2017 (4) TMI 237 - AT - Income Tax

Revision u/s 263 - disallowance u/s. 40(a)(ia) - Held that - Assessee had given two separate categories of the expenses. Any prudent Assessing Officer would have been prodded to make further enquiries since a part of the expenses was claimed to be for the benefit of the employees and part of the expenses was claimed to be for corporate advertisement. Whether these expenses would fall in the category of corporate social responsibility, was an issue which should have been looked into by the Assessing Officer before completing the assessment. What he did was only to verify advertisement expenses and make a disallowance u/s. 40(a)(ia) of the Act for want of deduction of tax at source. In our opinion, not making enquiries which was required to be done on the face of the reply given by an assessee, was as good as not making any enquiry. It is trite law that failure to make any enquiry which is required to be done under law by the Assessing Officer in an assessment proceedings, would render the assessment order erroneous and prejudicial to the interests of Revenue. Coming to the question of interest expenditure, nothing has been asked by the Assessing Officer nor any reply given by the assessee during the original assessment, despite the fact that assessee did not show any secured loans or unsecured loans in its balance sheet for the two preceding years. Such circumstances also would clearly indicate that the claim of interest expenditure requires verification. Assessing Officer failed to do this also. Thus lack of enquiry is pregnant in the assessment order on the two aspects mentioned by Ld. PCIT. As held by Hon ble Apex Court in the case of Toyota Motor Corporation (2008 (8) TMI 56 - SUPREME COURT ), a cryptic order given by the Assessing Officer would be erroneous and prejudicial to the interests of Revenue where the issues require clear reasonings for accepting the claims of the assessee - Decided against assessee.

Summary

Issues Involved:
1. Disallowance of Corporate Social Responsibility (CSR) expenses.
2. Claim of interest expenditure.

Detailed Analysis:

1. Disallowance of Corporate Social Responsibility (CSR) Expenses:

The assessee, engaged in shipbuilding and repair, filed a return declaring an income of ?2,33,18,11,800/-. During assessment, the Assessing Officer (AO) disallowed ?61,60,000/- of CSR expenses for want of tax deduction at source. The Principal Commissioner of Income-tax (PCIT) issued a notice for revisionary proceedings under Section 263 of the Income Tax Act, 1963, citing two reasons: a provision of ?2,20,50,000/- included in CSR expenses and ?69,31,952/- for advertisement, and ?1,12,19,473/- incurred for the benefit of the assessee and employees, which PCIT argued did not relate to the business. The PCIT contended that the AO had not examined these expenses properly, rendering the order erroneous and prejudicial to the interests of the Revenue.

The assessee argued that the expenses were for business purposes, citing the Hon'ble Jurisdictional High Court's judgment in CIT vs. Travancore Cochin Chemicals Ltd. (243 ITR 284), which allowed expenses for employee welfare as part of CSR. The assessee claimed that the AO had examined the CSR expenses during the original assessment proceedings and had already disallowed ?61,60,000/- for advertisement expenses due to non-deduction of tax at source.

The Tribunal observed that the AO's verification was limited to the application of Section 40(a)(ia) of the Act and did not delve into the nature of the CSR expenses. The Tribunal noted that the AO failed to make necessary enquiries into whether the expenses incurred were indeed for the business's efficient functioning. The Tribunal upheld the PCIT's view that the AO's lack of enquiry rendered the assessment order erroneous and prejudicial to the interests of the Revenue.

2. Claim of Interest Expenditure:

The PCIT also noted that the assessee had debited ?26,66,81,000/- as interest on loans in its profit and loss account, but the balance sheets did not reflect any secured or unsecured loans in the preceding two years. The PCIT argued that the AO had not verified the purpose of the loans before allowing the interest claim, making the assessment order erroneous and prejudicial to the Revenue's interests.

The assessee contended that the interest was paid to banks and the Indian Navy for loans taken and squared up during the relevant year, which is why no loans appeared in the balance sheets. The assessee argued that the PCIT's concerns were merely apprehensions without pointing out any specific error in the assessment order.

The Tribunal found that the AO had not made any enquiries regarding the interest expenditure claim, despite the absence of loans in the balance sheets. The Tribunal held that the AO's failure to verify the interest expenditure claim constituted a lack of enquiry, making the assessment order erroneous and prejudicial to the Revenue's interests.

Conclusion:

The Tribunal concluded that the AO had failed to make necessary enquiries regarding the CSR expenses and interest expenditure claims. The Tribunal upheld the PCIT's invocation of Section 263 of the Act, affirming that the AO's lack of enquiry rendered the assessment order erroneous and prejudicial to the Revenue's interests. Consequently, the Tribunal dismissed the assessee's appeal.